Case Scenario

Question 1: M. India Ltd. (MIL) is an automobile manufacturer in India and a

subsidiary of Japanese automobile and motorcycle manufacturer Leon. It
manufactures and sells a complete range of cars from the entry level to the
hatchback to sedans and has a present market share of 22% of the Indian passenger
car markets. MIL uses a system of standard costing to set its budgets.
Budgets are set semi-annually by the Finance department after the approval of the
Board of Directors at MIL. The Finance department prepares variance reports each
month for review in the Board of Directors meeting, where actual performance is
compared with the budgeted figures.
Mr. Suzuki, group CEO of the Leon is of the opinion that Kaizen costing method
should be implemented as a system of planning and control in the MIL.
Required: RECOMMEND key changes vital to MIL’s planning and control
system to support the adoption of Kaizen Costing Concepts’.
Case Scenario
ANI is a government – owned bank. The Bank has over 2,500 branches in country
“A” spread over all states/Union territories including specialized branches. These
branches are controlled through 27 Zonal offices and 4 NBG Offices. As a
government owned bank it has usually been the first preference for customers
while choosing a bank. In the last six years, the government has permitted a
number of foreign banks to operate within the country in order to solve the
problem of foreign exchange shortage and open up foreign trade as an instrument
to promote economic development. These foreign banks offer diverse range of
services such as direct access to executive management, a single point of contract
to coordinate all banking needs, appointment banking to save time, free online
banking services 24/7, free unlimited ATM access etc. In contrast ANI has very
elementary information system, covering only for internal transactions like-
checking bank balance, cash deposit and withdrawals, transferring money from one
account to another in Operational hours. Often customers complain about the
amount of time as the employees and clerical staff of the bank can attend only few
customers at a time. Customer service evaluation has never been undertaken by
ANI. Other processes, new account applications are complex, requiring completion
of many documents formalities. Board of Directors were worried from growing
popularly of new style banks. The Board of Directors of ANI has recently held
meeting to discuss the shortfalls in its current services and the need to re-engineer
the ANI’s business processes.
Required:-
ADVISE how Business Process Rengineering (BPR) can be used to improve
ANI’s current Processes.
Kaizen Costing in Practice
Kaizen Costing becomes part of the Package At the start of 2002 a UK company
called Kappa Packaging (now part of the Smurfit Kappa Group) had a factory in
Greater Manchester that made, among other products, cartons to hold bottles of
drink. That year the firm introduced a new approach to cutting the amount of waste
paper and cardboard it was producing, which stood at 14.6 per cent of the raw
materials consumed. The new approach included the following initiatives:
(a) Making employees more aware of how much waste was being produced.
(b) Requiring them to monitor the amount of waste for which they were
individually responsible.
(c) Establishing a Kaizen team to find ways of reducing waste. As a result,
Kappa was able to reduce waste from 14.6 per cent to 13.1 per cent of raw
materials used by the end of 2002 and down to 11 per cent in 2003.
Each percentage-point saving was worth an estimated £110,000 a year. 5S is the
name of a workplace organization method that uses a list of five Japanese words:
seiri, seiton, seiso, seiketsu, and shitsuke. It explains how a work space should be
organized for efficiency and effectiveness by identifying and storing the items
used, maintaining the area and items, and sustaining the new order.

There are 5S phases: They can be translated from the Japanese as “sort”, “set in
order”, “shine”, “standardize”, and “sustain”
Sort (Seiri)
 Make work easier by eliminating obstacles and evaluate necessary items
with regard to cost or other factors.
 Reduce chances of being disturbed with unnecessary items.
 Prevent accumulation of unnecessary items.
Set in Order (Seiton)
Arrange all necessary items into their most efficient and accessible arrangements
so that they can be easily selected for use and make workflow smooth and easy.
Ensure first-in-first-out FIFO basis, so that it is easy to find and pick up necessary
items.
Place components according to their uses, with the frequently used components
being neared to the work.
Shine (Seiso)
 Clean your workplace on daily basis completely or set cleaning frequency.
 Keep workplace safe, easy to work, clean and pleasing to work in.
 In an unfamiliar environment, people must be able to detect any problems
within 50 feet.
Standardize (Seiketsu)
 Standardize the best practices in the work area.
 Maintain high standards, orderliness, everything in order and according to its
standard.
 Every process has a standard.
Sustain (Shitsuke)
 Not harmful to anyone, training and discipline, to maintain proper order.
 Also translates as “do without being told”.
 Training is goal-oriented process. Its resulting feedback is necessary
monthly.
5S in Lean Product & Process Development
Information is the output of engineering and design in a lean enterprise, the theory
behind using 5S here is “Dirty, cluttered, or damaged surfaces attract the eye,
which spends a fraction of a second trying to pull useful information from them
every time we glance past. Old equipment hides the new equipment from the eye
and forces people to ask which to use.”
5S methodology is being applied to a wide variety of industries including
Manufacturing, Health care, Education & Government.
Application of 5S
Application in Web Based App that Needs a Screen Interface
 Seri (sort)-Seri can be thought as a sorting through features, interface
elements, and screens to minimize an application or a single screen to its
most essential parts.
 Seiton (set in order)-Seiton is about designing for uniformity so that users
can derive meaning from a page’s content based on how it is laid out.
 Seiso (shine)-Seiso can relate to improving or updating the look of
graphical elements, devoting attention to more perfect alignment and
distribution amount page elements, and devising colour palettes that
contribute to the overall mood and personality of the application.
 Seiketsu (standardize)-Online, adhering to standards means using proper
semantic mark up in webpages and keeping the code used for presentation
and content clearly separated.
 Shitsuke (sustain)-Improvement should not come in smart waves and then
fade away. It should be kept on permanent basis. The repeated process of
reduction to retain only what’s needed in a screen application, the
arrangement of elements into most effective forms, the polishing of what’s
left and the standardisation of screen are the processes that should be
maintained.
JIT in Practice
Question 2: Mahindra & Mahindra (M&M)
M&M wanted to implement JIT at their main plant in Nasik as they were aware of
the fact that JIT approach will help them to operate with minimal levels of
inventory. Their business objective was to make all our suppliers active
participants" in the production process. They wanted that the suppliers should be
"enabled" to know of any change in the whole production process and at the same
time contribute actively. This was necessary to reduce the time-to-respond to a
situation and help "just-in-time" approach in the production process.
Objective
 Make all the suppliers active participants in the production process.
 Suppliers should be able to know of any change in the whole production
process and at the same time contribute actively.
 Update to best practices for supply strategies for 400 vendors, 150 vehicles
per day and 1,100 parts.
 Improvement of the replenishment efficiency.
 Reduction of stock at the assembly line favoring a flexible manufacturing.
VSS Service
Concept planning for JIT and supply chain including definition of load units and
their arrangement at the assembly line, definition of the replenishment trigger
concept, design of stores and handling equipment and review of the method of
supply from vendors.

  
Question 3: KP Ltd. (KPL) manufactures and sells one product called “KEIA”.
Managing Director is not happy with its current purchasing and production system.
There has been considerable discussion at the corporate level as to use of ‘Just in
Time’ system for “KEIA”. As per the opinion of managing director of KPL Ltd. –
“Just-in-time system is a pull system, which responds to demand, in contrast to a
push system, in which stocks act as buffers between the different elements of the
system such as purchasing, production and sales. By using Just in Time system, it
is possible to reduce carrying cost as well as other overheads”.
KPL is dependent on contractual labour which has efficiency of 95%, for its
production. The labour has to be paid for minimum of 4,000 hours per month to
which they produce 3,800 standard hours.
For availing services of labour above 4,000 hours in a month, KPL has to pay
overtime rate which is 45% premium to the normal hourly rate of `110 per hour.
For avoiding this overtime payment, KPL in its current production and purchase
plan utilizes full available normal working hours so that the higher inventory levels
in the month of lower demand would be able to meet sales of month with higher
demand level. KPL has determined that the cost of holding inventory is `70 per
month for each standard hour of output that is held in inventory.
KPL has forecast the demand for its products for the first six months of year 2018
as follows:
Month Demand (Std. Hrs.)
Jan’18 3,150
Feb’18 3,760
Mar’18 4,060
Apr’18 3,350
May’18 3,650
Jun’18 4,830
Following other information is given:
All other production costs are either fixed or are not driven by labour hours
worked.
Production and sales occur evenly during each month and at present there is no
stock at the end of Dec’17.
(iii) The labour are to be paid for their minimum contracted hours in each month
irrespective of any purchase and production system.
Required: As a chief accountant you are requested to COMMENT on managing
director’s view.
  
Question 4: Which three of the following statements are true in the context of
a just in time (JIT) inventory system?
 It is dependent upon a close and mutually beneficial working relationship
with suppliers.
 It can result in much reduced inventory holding costs.
 It inevitably increases the need for safety inventories.
 It requires suppliers to operate sound quality control procedures.
 It works best if supplies are obtained from a number of different suppliers.
  
Question 5: The adoption of JIT normally requires which one of the following
factors to increase?
A. Inventory levels
B. Work-in-progress levels.
C. Batch sizes
D. Quality standards
  
Question 6: Which three of the following statements are true in the context of
a just in time (JIT) inventory system?
 It is dependent upon a close and mutually beneficial working relationship
with suppliers.
 It can result in much reduced inventory holding costs.
 It inevitably increases the need for safety inventories.
 It requires suppliers to operate sound quality control procedures.
 It works best if supplies are obtained from a number of different suppliers.
  
Question 7: Which of the following is an aspect of JIT?
I. The use of small frequent deliveries against bulk contracts
II. The grouping of machines or workers by product or component instead of by
type of work performed
III. A reduction in machine set-up time
IV. Production driven by demand
 None of them
 All of them
 I only
 III and IV
  
Question 8: Which of the following are usually elements of a JIT system?
(i) Machine cells
(ii) Inventory only held at the bottleneck resource
 (iii) Close relationship with major suppliers
(iv) Multi-skilled labour
A. (i), (ii) and (iii) only
B. (i), (iii) and (iv) only
C. (i) and (iii) only
D. All of these
  
Question 9: Which of the following statements about JIT is correct?
A. JIT protects an organization against risks of disruption in the supply chain.
B. A narrow geographical spread in a business makes JIT more difficult to
apply.
C. With JIT, there is a risk that inventories could become obsolete.
D. JIT is more difficult to implement when it is not easy to predict patterns of
demand.
  
Question 10: Which of the following are aspects of a successful JIT system?
(i) Demand- driven protection.
(ii) Savings in total machine set-up time.
(iii) Grouping machines or workers by product or component rather than by the
type of work performed.
A. (i) and (ii) only
B. (i) and (iii) only
C. (ii) and (iii) only
D. All of these
  
Question 11: Which of the following costs are likely to be reduced on the
introduction of a JIT system in a company?
Tick ALL that apply:
 Purchasing costs
 Inventory holding costs
 Ordering costs
 Information system costs
   
Question 12: Which two of the following are NOT features of a just-in-time (JIT)
purchasing and production system?
 Maximum capacity utilization.
 Pull scheduling: buying or producing at each stage of the supply chain only
when the next stage in the chain wants the output.
 Kanban control: using a system of signaling work flow requirements using
cards or other signaling devices.
 Greater visibility of what is going on, such as open plan work place layouts
and coloured lights to indicate stoppages.
 Relying on a wide range of suppliers for raw materials and components, to
ensure immediate availability of items.
  
Question 13: CIMA’s definition of just-in-time production is:
 A system which is driven by demand for finished products, whereby each
component on a production line is produced only when needed for the next
stage
 A system in which material purchases are contracted so that the receipt and
usage of material, to the maximum extent possible, coincide
 A system where the primary goal is to maximize throughput while
simultaneously maintain or decreasing inventory and operating costs
 A system that converts a production schedule into a listing of the materials
and the components required to meet that schedule, so that adequate
inventory levels are maintained and items are available when needed.
  
Question 14: Which THREE of the following contribute to successful
implementation of JIT?
 Close relationship with supplier
 Minimal set-up time and costs
 Non perishable raw materials
 Non perishable finished goods
 Similar production time across all stages of the production process
   
Question 15: Which three of the followings are particular problems of JIT?
 It is not always easy to predict pattern of demand.
 JIT is a demand led system.
 JIT makes the organization far more vulnerable to disruption in the supply
chain.
 Wide geographical spread makes JIT difficult.
 There is a risk that inventory may become obsolete.
  
Question 16: Which of the following is not suitable for a JIT production system?
A. Batch production
B. Jobbing production
C. Process production
D. Service production
  
Question 17: Which of the following statements about JIT is correct?
A. JIT protects an organization against risks of disruption in the supply chain.
B. A narrow geographical spread in a business makes JIT more difficult to
apply.
C. With JIT, there is a risk that stocks could become obsolete.
D. JIT is more difficult to implement when it is not easy to predict Patterns of
demand.
  
Question 18: A Just in Time (JIT) Purchasing system may be defined as:
A. A Purchasing system in which the purchase of material is contracted so that
the receipts and usage of material coincide.
B. A purchasing system which is based on estimated demand for finished
products.
C. A Purchasing system where the purchase of material is triggered when
inventory levels reach a pre-determined re-order level.
D. A Purchasing system which minimizes the sum of inventory ordering costs
and inventory holding costs.
   
Question 19: The following independent situations are given in JIT systems of
production. You are required to state if each recommendation is valid or
invalid and give a brief reason.
SI. Situation Recommendation by the Cost Accountant
No.
(i) A company produces LCD Compute inventory turnover every month.
TVs. Presently total Break it down into raw material, WIP,
inventory turnover is expensive inventory and finished goods.
measured annually.
(ii) Textile company. Accept employees’ claim for piece rate
incentive for exceeding a certain production
volume.
(iii) Sports goods manufacturing Closely monitor direct labour variances
company. including idle time variances to convince
employees to work faster.
(iv) Multiproduct production Monitor the average set up time per
machine in a period which is given by
Aggregate set up time of all machines Total
number of machines.

  
Question 20: United Video International Company (UVIC) Sells Package of blank
video tapes to its customer. It purchases video tapes from Indian Tape Company
(ITC) @ ` 140 a package. ITC pays all Freight to UVIC. No incoming inspection is
necessary because ITC has a superb reputation for delivery of quality merchandise.
Annual demand of UVIC is 13,000 packages.
UVIC requires 15% annual return on investment. The purchase order lead time is
two weeks. The purchase order is passed through internet and it costs ` 2 per order.
The relevant insurance, material handling etc ` 3.10 per package per year. UVIC
has to decide whether or not to shift to JIT purchasing. ITC agrees to deliver 100
packages of video tapes 130 times per year (5 times every two weeks) instead of
existing delivery system of 1,000 packages 13 times a year with additional amount
of ` 0.02 per package. UVIC incurs no stock out under its current purchasing
policy. It is estimated UVIC incurs stock out cost on 50 video tape packages under
a JIT purchasing policy. In the event of a stock out, UVIC has to rush order tape
packages which costs ` 4 per package. Comment whether UVIC should implement
JIT purchasing system.
Hindustan Tape Company (HTC) also supplies video tapes. It agrees to supply @
` 136 per package under JIT delivery system. IF video tape purchased from HTC,
relevant carrying cost would be ` 3 per package against ` 3.10 in case of purchasing
from ITC. However HTC. Doesn’t enjoy so sterling a reputation for quality. UVIC
anticipates following negative aspects of purchasing tapes from HTC.
- To incur additional inspection cost of 5 paisa per package.
- Average stock out of 360 tapes packages per year would occur, largely
resulting from late deliveries. HTC cannot rush order at short notice. UVIC
anticipates lost contribution margin per package of ` 8 from stock out.
- Customer would likely return 2% of all packages due to poor quality of the
tape and to handle this return an additional cost of ` 25 per package.
Comment whether UVIC places order to HTC.
  
Question 21: Maharishi Medical instruments is considering JIT implements in
2012. Maharishi’s annual demand for Material is 20,000 units. If Maharishi
implements JIT, the purchase price of the Material is expected to increase from
`100 to ` 110 because of frequent deliveries by Apollo Manufacturing, Limited.
Apollo enjoys a sterling reputation for quality and reliability. Ordering costs will
remain at ` 50 per order. However, the annual number of orders placed will be 200
instead of the current 20. As a result of frequent ordering, Maharishi’s order size
will decrease proportionally. Maharishi’s required rate of return on investment is
20%. Other carrying costs will remain at ` 45 per unit. ` 30 per unit stock-out costs
on 100 units during the year.
Calculate the estimated savings (loss) for Maharishi Medical Instruments from the
adoption of JIT purchasing during JIT.
  
Question 22: A manufacturer is considering implementing Just in time inventory
system for some of its raw material purchases. As per the current inventory policy,
raw materials required for 1 month’s production and finished goods equivalent to
the level of 1 week’s production are kept in stock. This is done to ensure that the
company can cater to sudden spurt in consumers demand. However, the carrying
cost of inventory has been increasing recently. Hence, the consideration to move to
a more robust just in time purchasing system that can reduce the inventory carrying
cost. Details relevant to raw material inventory are given below:
- Average inventory of raw material held by the company throughout the year is `
1 crore. Procurement of raw material for the year is ` 12 crore. By moving to
just in time procurement system, the company aims at eliminating holding this
stock completely in its warehouse. Instead, suppliers of these materials are
ready to provide the goods as per its production requirements on an immediate
basis. Suppliers will now be responsible for quality check of raw material such
that the raw material can be used in the assembly line as soon as it is delivered
at the company’s factory shop floor.
- Increased quality check service done by the suppliers as well as to compensate
them for the risk of holding the inventory to provide just in time service, the
company is willing to pay a higher price to procure raw material. Therefore,
procurement cost will increase by 30%, total procurement cost will be `15.6
crore per year. Consequently, quality check and material handling cost for the
company would reduce by `1 crore per year. Similarly, insurance cost on raw
material inventory of `20 lakh per year need not be incurred any longer.
- Raw material is stored in a warehouse that costs the company rent of `3 crore
per annum. On changing to Just in time procurement, this warehouse space
would no longer be required.
- Production is 150,000 per year. The company plans to maintain its finished
goods inventory equivalent to 1 week’s production. Despite this, in order to
have a complete cost benefit analysis, the management is also factoring the
possibility of production stoppages due to unavailability of raw material from
the suppliers. This could happen due to of delay in delivery or non-conformance
of goods to the standard required. Labor works in one 8 hour shift per day and
will remain idle if there is no material to work on. Due to stoppage of
production for the above reason, it is possible to have stockout of 3,000 units in
a year. Stockout represents lost sales opportunity due to unavailability of
finished goods, the customer walks away without purchasing any product from
the company. Therefore, in order to reduce this opportunity cost and to make up
for the lost production hours, labor can work overtime that would cost the
company `10 lakh per annum. This is the maximum capacity in terms of hours
that the labor can work. With this overtime, stockout can reduce to 2,000 units.
- Currently, sale price of phone is `5,000 per unit, variable production cost is
`2,000 per unit while variable selling, general and administration (SG&A) cost
is `750 per unit. Raw material procurement cost is currently `800 per unit, that
will increase by 30% to `1,040 per unit under Just in time inventory system.
- On an average, the long-term return on investment for the company is 15% per
annum.
Required
(i) CALCULATE the benefit or loss if the company decides to move from
current system to Just in Time procurement system.
(ii) RECOMMEND factors that the management needs to consider before
implementing the just in time procurement system
  
Question 23: Haigh Ltd. is a leading manufacturing company. Under increasing
pressure to reduce costs, to contain inventory and to improve service, Haigh’s
Costing Department has recently undertaken a decision to implement a JIT System.
The management of Haigh is convinced of the benefits of their changes. But
Supplies Manager Mr. Smith fears with the Costing Department’s decision. He
said:
“We’ve been driven by suppliers for years ... they would insist that we could only
purchase in thousands, that we would have to wait weeks, or that they would only
deliver on Mondays!”
Required: Is Mr. Smith’s view point correct and why?

  
Question 24: X video Company sells package of blank video tapes to its
customers. It purchases video tapes from Y Tape Company at ` 140 per packet. Y
tape Company pays all freight to X Video Company. No incoming inspection is
necessary because Y Tape Company has a superb reputation for delivery of
quality merchandise. Annual demand of X video Company is 13,000 packages.
X video Company requires 15% annual return on its investment. The Purchase
order lead time is 2 weeks.
The Purchase order is passed through internet and it costs ` 2 per order. The
relevant insurance, material handling etc. is ` 3.10 per package per year.
X video Company has to decide whether or not to shift to JIT Purchases. Y tape
Company agrees to deliver 100 packages of video Tapes 130 times per year (5
times every 2 weeks) instead of existing delivery system of 1,000 packages 13
times a year, with additional amount of ` 0.02 per package. X video Company
incurs no stock out under its current purchasing policy. It is estimated that X video
Company will incur stock out cost on 50 video tape packages under a JIT
Purchasing Policy. In the event of a Stock out, X Video Company has to rush order
tape packages, which costs ` 4 per package. Comment whether X video Company
should implement JIT purchasing System.
Z Co. also supplies video tapes. It agrees to supply at ` 136 per package under JIT
delivery system.
If video tape is purchases from Z Co. relevant carrying cost would be ` 3 per
package against ` 3.10 in case of purchasing from Y tape Company. However Z
Co. does not enjoy a sterling reputation for quality. X Video Company anticipates
the following negative aspects of purchasing tapes from Z Co. Incurring additional
inspection cost of ` 0.05 per package.
• Average stock out of 360 tape packages per year would occur, largely
resulting from late deliveries. Z Co. cannot rush order at short notice. X
Video Company anticipates lost contribution margin per package of ` 8 from
Stock out.
• Customers would likely return 2% of all packages due to poor quality of the
tape and to handle this return, an additional cost of ` 25 per package would
be incurred.
Comment on whether X video Company can place an order with Z Co.

  
Question 25: A Company has an average stock of raw material of ` 10,00,000. The
Management are concerned about the costs of carrying inventory. The steel
suppliers is willing to supply raw material in smaller lots at no additional charge.
The Management identified the following effects of adopting a JIT inventory
program to virtually eliminate raw material inventory.
(1) Without scheduling any overtime, lost sales due to stock outs would increase
by 35,000 units per year. However, by incurring overtime premiums of
` 40,000 per year, the increase in lost sales could be reduced to 20,000 units.
This would be the maximum amount of overtime that would be feasible for
Company.
(2) Two warehouses currently used for steel bar storage would no longer be
needed. Company rents one warehouse from another company, under a
cancelable leasing arrangement, at an annual cost of ` 60,000. The other
warehouse is owned by Company and contains 12,000 square feet.
Three-fourths of the space in the owned warehouse could be rented for ` 1.50 per
square foot per year. Insurance and properly tax costs totaling ` 10,000 per year
would be eliminated.
Long-term capital investments by Company are expected to Produce an annual rate
of return of 10%.
Company Budgeted income statement for the year ending December 31,2003, (in
thousands) is as follows:
(` ”000”)
Revenues 20,000
Variable Cost 12,000
Fixed Cost 3,000
Income 5,000
Qty 5,00,000 units
Calculate the estimated savings (loss) for the Company that would result in 2003
from. The adoption of the JIT inventory –control method.
  
Question 26: XYZ Ltd. has decided to adopt JIT policy for materials. The
following effects of JIT policy are identified – Capital Expenditure ` 6,00,000. The
new facilities will require a cash operating cost ` 48,000 per annum.
• The Company can earn 20% on its long-term investments.
• Due to receipt of smaller lots of Raw Materials, there will be some
disruption of production.
• Presently there are 7 workers in the Stores Department at a Salary of ` 3,000
each per month.
After implementing JIT Scheme, only 2 workers will be required in this
Department. Of the balance 5 workers, 3 will be transferred to other
departments, while 2 workers employment will be terminated.
• Raw Material Stockholding will be reduced from ` 28,00,000 to ` 8,00,000.
• The Company can avoid rental expenditure on storage facilities amounting
to `30,000 per annum. Property Taxes and insurance amounting to
` 20,000 will be saved due to JIT Programme. The Costs of Stock-out will be
` 4,00,000 in the first year only. This Stock-out Costs can be brought down
to nil from the second year onwards.
Determine the financial impact of the JIT policy. Is it advisable for the company to
implementing JIT system?
  
JIT for WIP & Finished Goods
Question 27: Calculation of reduction in storage costs arising from the
implementation of JIT production and purchasing Product plc has an annual
turnover of ` 6,00,00,000 from a range of products, Material costs and conversion
costs account for 30% and 25% of turnover respectively. Other information
relating to the company is as follows:
(i) Stock values are currently at a constant level, being:
Raw materials stock: 10% of the material element of annual turnover.
(a) Work in Progress: 15% of the material element of annual turnover
represent Material together with a proportionate element of conversion
costs in annual turnover, allowing for 60% completion of work in
progress as to conversion cost and 100% completion for material. The
Ratio is constant for all products.
(b) Finished goods stock: 12% of the material element of annual turnover
represent Material together with a proportionate element of conversion
cost in Annual turnover.
(ii) Holding and acquisition costs of materials comprise fixed costs of
` 2,00,000 per annum plus variable costs of ` 0.10 per ` of Stock held.
(iii) Movement and control costs of work in progress comprise fixed costs of `
2,80,000 per annum plus variable costs of ` 0.05 per ` of material value of
work-in-progress.
(iv) Holding and control costs of finished goods comprise fixed costs of
` 3,60,000 per annum plus variable costs of ` 0.02 per ` of finished goods
(material cost + Conversion cost)
(v) Financial charges due to the impact of stock holding on working capital
requirement are incurred at 20% per annum on the value of stocks held.
Product Plc are considering a number of changes due to following JIT Policy,
which it is estimated will affect stock levels and costs as follows:
1. Raw Material Stock: Negotiate delivery from suppliers on a just in time
basis. Stock levels will be reduced to 20% of the present level. Fixed costs
of holding and acquiring stock will be reduced to 20% of the present level
and variable costs to ` 0.07 per ` of stock held.
 2. Work in Progress: Convert the layout of the production area into a
dedicated cell format for each product type instead of the existing system
which comprises groups of similar machines to which each product type
must be taken. Work in progress volume will be reduced to 20% of the
present level with the same stage of completion as at present. Fixed costs of
movement and control will be reduced to 40% of the present level and
variable costs to ` 0.03 per ` of material value of work in progress.
Finished goods stock: Improved control of the flow of each product type
from the production area will enable stocks to be reduced to 25% of the
present level. Fixed costs of holding and control will be reduced to 40% of
the present level and variable costs to ` 0.01 per ` of finished goods held.
Evaluate the Proposal.
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JIT with Capital Budgeting
Question 28: Galaxy Ltd. produces office furniture and sells it wholesale to
furniture distributors. Company management is reviewing a proposal to purchase a
Just-in-time inventory (JIT) system to better serve its customers. The JIT system
will include a computer system and materials handling equipment. The decision
will be based on whether the new JIT system is cost effective to the organization
for the next three years.
The computer system, including hardware and software, will initially cost
`3,50,000. Materials handling equipment will cost ` 5,50,000. Both groups of
equipment will have a three-years useful life for tax reporting of depreciation
(straight-line) calculated assuming a ` 0 terminal disposal value.
At the end of the three years, the newly acquired materials-handling equipment is
expected to be sold for ` 50,000. The computer system will have a ` 0 terminal
disposal value at the end of three years.
Other factors to be considered over the next three years for this proposal include
the following:
1. Due to the service improvement resulting from this new JIT system,
Company will realize a ` 800,000 revenue increase to continue to grow by
10% per year thereafter.
2. The contribution margin is 50%.
3. Annual material- ordering costs will increase ` 20,000 due to a greater level
of purchase orders.
 4. (i) There will be a one–time decrease in working capital investment of
` 150,000 at the end of the first year.
(ii) There will be a 20% savings in warehouse rent due to less space being
needed. The current annual rent is ` 10,00,000.
Company uses an after-tax required rate of return of 10% and is subject to an
income tax rate of 50%.
Assume that all cash flows occur at year-end for tax purposes except for any initial
purchase amounts.
1. Prepare an analysis of the after tax effects for the purchase of the JIT system
at Galaxy Ltd. using the net present value method for evaluating capital
expenditures. Be sure to show all of your computations and Determine
whether company should purchase the Jit system.
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Question 29: Innovation Ltd. has entered into a contract to supply a component to
a company which manufactures electronic equipments. Expected demand for the
component will be 70000 units totally for all the periods. Expected sales and
production cost will be
Period 1 2 3 4
Sales (units) 9500 17000 18500 25000
Variable cost per unit 30 30 32.50 35
Total fixed overheads are expected to be ` 14 lakhs for all the periods.
The production manager has to decide about the production plan.
The choices are:
Plan 1: Produce at a constant rate of 17500 units per period. Inventory holding
costs will be `6.50 per unit of average inventory per period.
Plan 2: Use a Just-In-Time (JIT) system Maximum capacity per period normally
18000 units
It can produce further up to 10000 units per period in overtime. Each unit produced
in overtime would incur additional cost equal to 30% of the expected variable cost
per unit of that period.
(i) Calculate the incremental production cost and the savings in inventory
holding cost by JIT production system.
(ii) Advise the company on the choice of a plan.
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BACKFLUSH COSTING
Question 30: Give Back flush Costing Journal Entries in respect of following
transactions:
(i) Raw Material were purchased ` 3,20,000
(ii) Material placed into production
(iii) Actual Direct Labour Cost ` 50,000
(iv) Actual Overhead Cost ` 4,50,000
(v) Conversion Cost applied `4,70,000
(vi) All Units were completed &Sold
(vii) Variance is Recognized.
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Question 31: Greenfield Company uses a backflush costing system with three
trigger points:
 Purchase of direct materials
 Completion of good finished units of product
 Sale of finished goods
There are no beginning inventories. Data for April 2006 are
Direct materials `88,00,000 Conversion costs ` 40,00,000
purchased allocated/applied
Direct materials used 85,00,000 Costs transferred to 1,25,00,000
finished goods
Conversion costs 42,20,000 Costs of goods sold 1,19,00,000
incurred
Required:
1. Prepare summary journal entries for April (without disposing of under
allocated or over allocated conversion costs). Assume no direct materials
variances.
2. Under an ideal JIT production system, how would the amounts in your
journal entries differ from the journal entries in requirement 1?
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 CALCULATION OF O.E.E.
Question 32: Gold Coast Company Ltd. manufactures spare parts. It works in two
shifts of 8 hours for 6 days in a week. Lunch break is 45 mins and other
miscellaneous breaks add up to 25 minutes. The following details are collected for
the last 4 weeks by the TPM team for one of their important equipment
Hours for Planned Preventive Maintenance = 15 minutes per shift
For Breakdown Maintenance = 6 hours total
Set up Changes = 15 hours total
Power Failure = 4 hours total
Standard Cycle Time per piece = 3 minutes
No of Parts Produced per shift = 120
Parts Accepted per shift = 115
Required: CALCULATE ‘OEE’.
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Question 33: SSK Pharmaceuticals Ltd. is producing medication products (pills,
balms etc.) and can be called high volume based production environment. There
are several different automated production machines located in the plant, through
which production of medicines is accomplished and fulfilled the demands. Plant
operates in double shift a day each consisting of 8 hours with 30 minutes’ lunch
break and tea break of 15 minutes. Following data pertains to automated machine
‘X-78’.
X-78
14 February 2018, Wednesday
Breakdown, repair and start up time 68 minutes
Standard cycle time 2.5 minutes per tablet
Quality loss due to scrap, rework and rejection 50 tablets
Total quantity produced 280 tablets
Required
COMMENT on OEE.
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Question 34: Hindustan Ltd. supplies the following information relating to a vital
equipment used in its production activity for April, 2019:
Total time worked during the month 210 hrs
Total production during the month 2,800 units
No. of units accepted out of total production 2,520 units
Standard time for actual production of the month 180 hrs
Time lost during the month 28 hrs
Required:
(i) STATE an appropriate approach to measure the total productive
maintenance performance of an equipment.
(ii) Quality the total productive maintenance performance of the above-
mentioned equipment by using the approach stated in (i) above.
(iii) COMMENT on the effectiveness of maintenance of the equipment.
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Question 35: Bone Group, which manufactures valves and pumps, and provides
engineering services, has recruited three top executives from the automotive
industry, as part of its long term intention to bring lean manufacturing methods to
the firm from the car industry.
Which one of the following best describes Bone Group’s decision to introduces
lean manufacturing method?
A Corporate strategy and a deliberate strategy
An operational strategy and a deliberate strategy
A business unit strategy and a deliberate strategy
A business unit strategy and an emergent strategy.
Answer: The correct answer is: An Operational strategy and a deliberate
strategy.
Strategy can be categorizes into corporate strategy (What business should we be
in?), business unit strategy (how to approach a particular market or business unit)
and operational strategy (decisions of strategic importance taken a t operational
level, such as investment in plant and investment in personnel). The strategy
described here is a manufacturing strategy, i.e. an operational strategy.
Strategy can also be categorizes into emergent and deliberate. An emergent
strategy is one that develops without management ‘s conscious intention, while a
deliberate strategy arises from careful planning. The decision to bring in lean
manufacturing techniques from the car industry is clearly a deliberate strategy
rather than an emergent one.

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